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According to research by the Prudential exploring the retirement reality for pensioners in 2011, findings reveal that the majority took a tax-free lump sum from their pension fund when they retired. The research also found that more than two in five pensioners (43%) surveyed say they are now living a ‘cautious’ retirement and worry about having sufficient long-term income to get by.

For many pensioners, the option to take a lump sum at the point of retirement is the most tax-efficient way to access some of their pension fund. The majority of pensioners surveyed still take a tax-free lump sum from their pension when they retire, despite concerns about making retirement pots last. Nearly eight out of 10 (79 per cent) of those drawing a company or private pension in 2011 took a lump sum from their fund at retirement, compared with 76 per cent three years ago. However more than half (52 per cent) of those who had taken a lump sum put some of the money in a savings account and just over a quarter (26 per cent) invested in stocks, shares or investment trusts.

The research also found that one in 10 of those who did take a tax-free lump sum either said they now regret the decision or that they had not fully understood the long-term impact it would have on their retirement income. These pensioners are beginning to regret the way they used the tax-free cash.

Previous Prudential research found that of those who took and spent a lump sum from their pension pot at retirement, a third (33 per cent) used all or part of it for home improvements, 31 per cent paid for a holiday, and two in five (19 per cent) bought a new car. The recent research suggests that the days of buying a shiny new car or going on a once-in-a-lifetime holiday may be gone, to be replaced by making savings and investments with the lump sum to supplement retirement income, at least for the time being!

The Prudential report concludes that there is no one-size-fits-all answer to the financial choices that people need to make when they retire. For example, spending the money from a tax-free lump sum and taking a level annuity with the balance of a pension fund could effectively fix the level of retirement income – and for some this may provide the stability they need. Others may wish to explore more flexible retirement products that take into account the effects of inflation.

There does, of course, need to be a balance. Many people want to spend their at-retirement lump sum in a way they have looked forward to for many years. Those who are planning to retire in the near future and are uncertain about their financial choices should seek regular professional financial advice, to ensure they secure the long-term retirement income they need.

If you want to find out more about planning for retirement, contact one of the team who will be happy to help.

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